Transgaz - September 2008

IULIANA SIMONA MOCANU - Head of Research Department RAIFFEISEN CAPITAL & INVESTMENT S.A.

 

Still a buy even with a more sceptical view on costs

Transgaz 1H 2008 results showed revenues in line with forecasts, but profit stood higher than estimated on lower grid losses and maintenance expenses. However, we believe the costs will pick up the pace in 2H 2008 and by the year-end the company will meet its budget.

The Regulatory Authority in the Energy Sector (ANRE) has revised Transgaz tariffs for domestic transportation of gas. The regulated revenues for July 2008 – June 2009 were raised 20% yoy, slightly below our expected 25%. Even though the increase was smaller than our forecast, we see it as a positive development given that 2008 is a general elections year and populist decisions are favoured. We believe that this points to a lower regulatory risk. In addition the implementation of the balancing and dispatch tariff, projected for the beginning of July, has been postponed. The impact of the postponement is minimal as the new stream of revenues exercised a negligible influence on the bottom line.

On the costs side we adjusted the depreciation expense by taking into account the 2007 released figure. We feel that the growth in the domestic gas price was contained over 2008 and we believe the raise might be higher than previously estimated in 2009. We have also revised the number of employees and assumed the decrease rate in the personnel number will be slower. The revisions made led to 15% lower earnings on average over 2008-2016.

Valuation: The DCF valuation points to a 12-month target price of RON 247.5 per share (RON 277.1 previously), and reflects a 30% upside over the current market price hence we maintain our “buy” recommendation. The relative valuation puts TGN at a 39% to 46% discount to its peers, based on 2008e and 2009e EV/EBITDA multiples. Though part of the discount is justified by the majority stake owned by the state and the regulatory risk, it supports our view that the company is undervalued.

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